Sorting Out A New World Of Mortgage Possibilities

By MATTHEW L. WALD

Published: July 25, 1993

ONCE upon a time, a mortgage was forever. But no more. Homeowners on average now change mortgages more often than they buy a new car; some do it almost as often as they change the batteries on their smoke alarms.

Of about $3 trillion in mortgage debt on one- to four-family houses around the country, $894 billion, or nearly a third, was written last year. This year that total may top $1 trillion.

The reason is not sales, which are well below their historic peak; rather, it is refinancing. In more settled times, of every four mortgages written, three are on newly purchased houses and the fourth is a refinancing; lately, the majority are refinancings. "It's astounding, it's absolutely amazing," said Frank E. Nothaft, the deputy chief economist of the Federal Home Loan Mortgage Corporation, known as Freddie Mac. The volume of mortgages has doubled since 1990, he pointed out.

Why?

The world of interest rates has changed faster than almost anyone imagined possible a few years ago, opening up myriad choices not only to people buying homes but also to those who have lived in their homes for years for whom the blur of paperwork at the closing is now a distant memory, and who thought that all the decisions were behind them. These days holding onto a three-year-old mortgage simply because it's the one you already have makes about as much sense as holding onto shares of stock simply because you own them.

But as with stocks, the investment choices can be daunting. The menu includes fixed-rate and variable mortgages; 15-year mortgages and 20- or 30-year mortgages; a hybrid of long-term and short-term mortgages that masquerade as 30-year mortgages but require a "balloon" payment in the fifth or seventh year, and no-point mortgages or mortgages with points. Then there is the issue of pedigree; do you want a mortgage from a bank with a household name, the kind that offers checking accounts and ATM cards, or from a "mortgage bank" that is tucked away in a low-rent office building, but offers a better rate?

Another consideration today is that a homeowner who refinances may no longer believe that the new one is going to be the last. That sense of impermanence may incline consumers to one type of mortgage over another.

There are answers to all these questions, but they require a vocabulary slightly larger than the old one of appraisals and escrows, points and indexes. The new words are slightly off-putting -- securitized mortgages, mortgage wholesaling, and the shape of the yield curve -- but by no means impossible to understand.

It is difficult, though, to get agreement on what is best, because mortgage math is different as practiced by bankers and by economists. What is clear is that the turmoil is driven by erratic lurches in interest rates, generally down. Few thought rates would go this low and many bankers thought the "re-fi fever," as they refer to it, would have broken by now. "Everybody's projections were based on the idea that weak economic growth would continue," said Keith T. Gumbinger, an analyst at HSH Associates, a consulting firm in Butler, N.J., that tracks mortgage activity nationwide. In a growth economy, the Federal Reserve tends to keep interest rates up, to prevent inflation. But, as Mr. Gumbinger noted, "the economy is weakening yet again." That means the Federal Government can be expected to take action to hold rates steady, or even cut them.

But nobody is sure what inflation will do, and the month-to-month figures can affect interest rates as investors demand higher rates because they foresee inflation nibbling at the value of their money. "Early this year, inflation was dead," said Mr. Gumbinger. "Then suddenly it was running at a 4 or 4.5 percent annual clip. Then suddenly it's dead again." So at the moment, rates seem unlikely to rise in the immediate future.

With 30-year fixed rates now below 7.5 percent, and down a percentage point from a year ago, the mortgage market is beginning to resemble the personal computer market, where better and better products make last year's version obsolete quickly.

The rule of thumb used to be that a new mortgage was worth the closing costs if the new interest rate was 2 percentage points lower than the old. But if a homeowner plans to stay put long enough, refinancing can be worthwhile with a smaller differential, and bankers say that many people are apparently convinced that rates are not going lower and that this is a historic opportunity, even if the amount to be saved is less than 2 points. So they are refinancing now, or, in many cases, re-refinancing. The Federal National Mortgage Association estimates that the median difference between old mortgages and new ones on refinance is 1.6 or 1.7 percentage points.

But that leaves several questions. First is what is the appropriate term?

When housing prices were at their peak, a 15-year mortgage, with its higher monthly payments, often was not an option for financially stretched buyers. But now purchase prices are lower, and for refinancings, rates are low enough so that sometimes the monthly payments on a 15-year mortgage are little different from the ones on a 30-year fixed mortgage issued a few years ago.